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African Journal of Agricultural Research Vol. 6(31), pp.

6440-6452, 19 December, 2011

Available online at
DOI: 10.5897/AJAR11.1575
ISSN 1991-637X ©2011 Academic Journals

Full Length Research Paper

Policies and performances of agricultural/rural credit in

Bangladesh: What is the influence on agricultural
M. Wakilur Rahman1,2, Jianchao Luo1* and Enjiang Cheng3
College of Economics and Management, Northwest A and F University, China.
Department of Rural Sociology, Bangladesh Agricultural University, Bangladesh.
International Poverty Reduction Center in China (IPRCC), Zhejiang University, China.
Accepted 28 November, 2011

This paper evaluated the performance of various lenders’ agricultural/rural credit programs, assessed
the relationship between agricultural credit and farm production, and investigated the major challenges
and proposed remedial measures for future policy direction. The study employed time series data
collected from various national and international data sources. Both linear and exponential equations
adopted for analyzing the time series data. Pearson Correlation equation also applied to determine the
relationship between credit disbursement and farm production. It is found that the performance of
agricultural/rural credit of various lenders improved due to policy shift in recent years and the inclusion
of new financial intermediaries- Private Commercial Banks (PCBs) and Foreign Commercial Banks
(FCBs). Both the allocation of credit to agriculture and the target attainment had however been found
less satisfactory, although agricultural credit and production revealed a strong positive correlation at
1% level. The findings will help policy makers and practitioners to gain better understanding of
agricultural/rural financing and lead to better credit policies and programs.

Key words: Bangladesh, agricultural credit, scheduled banks, and agricultural production.


Agriculture is one of the prime sectors of Bangladesh‘s in respect to attaining marginal food sufficiency (Rahman
economy. This sector contributes about 20% of the and Parvin, 2009), creating employment opportunity,
country‘s Gross Domestic Product (GDP) and employs 44 improving standard of living, and finally reducing poverty.
per cent of the total labor force (BB, 2010). Within the The success has achieved due to continuous reform of
broad agricultural sector, the contribution of sub-sectors agricultural policies and its implementation in recent years
namely crops, livestock, forestry, and fisheries is (Mahmud, 2008; GoB, 2009). These include: The
estimated at 11.34, 2.66, 1.74, and 4.49% respectively National Agriculture Extension Policy; National Seed
(BBS, 2010). Agricultural sector contributes significantly Policy; Irrigation and Water Management Policy;
Integrated Pest Management Policy; and Agricultural/
Rural Credit Policy. Out of these policy interventions, the
agricultural/rural credit has been considered one of the
*Corresponding author. E-mail: crucial factors toward sustainable development of

Electronic copy available at:

Rahman et al. 6441

agricultural sector particularly to increase agricultural Bank, that is, ‗Agricultural Credit Monitoring System‘
production. It is apparent from previous studies that credit (Rahman, 2010). However, following questions need to
plays an important role in increasing agricultural be answered:
productivity. Timely and easy access to credit enables
farmers (including marginal farmers) to purchase the 1) Does lenders‘ performance change overtime due to
required inputs and machinery for carrying out farm policy shift?
operations and increase production (Abedullah, 2009; 2) What is the influence of agricultural credit on
Saboor et al., 2009). increasing production?
However, based on an old paradigm, like many 3) What are the remaining challenges of agricultural/rural
developing countries, the government of Bangladesh credit?
provided subsidized agricultural/rural credit through
Considering the potentiality and shortcoming of
specialized banks (Bangladesh Agricultural Bank and
agricultural credit program, present study aims to
Rajshahi Agricultural Development Bank) on grounds that
evaluate the performance of various lenders with the view
lending to agriculture sector expedites agricultural
of existing agricultural credit policy. The paper also tries
production. Unfortunately, the outcomes were not
to understand the relationship between agricultural credit
satisfactory and unsustainable with huge default rates,
and farm production such as food grain, livestock, and
poor performance of specialized banks, and credit being
fisheries. Last but not least, the paper investigates
allocated to wealthiest borrowers. The failure of the old
upcoming challenges for extending financial services to
paradigm is well documented in the previous literatures.
farmers/rural poor and proposes some solutions to
These are: portfolios concentrate in the hands of the
overcome these challenges.
wealthiest borrowers (Khandker and Faruqee, 1999;
Nagarajan and Meyer, 2005), large landowners use
formal loans unproductively (Khandker and Faruqee, METHODS
1999), a culture of non-repayment fosters because debts
forgiven due to political favor (Nagarajan and Meyer, The present paper is mainly based on secondary sources of
2005), highly subsidized credit discourages the information. Secondary data preferred for this study because of the
development of private financial intermediaries (Adams availability and accessibility of required data from reliable sources.
In fact, the study aims to evaluate the agricultural/rural credit
and Graham, 1981), and institutions become
performance of various lenders (SCBs, SBs, PCBs, FCBs and
unsustainable because of subsidized interest rates NGO-MFIs) where all of these lenders data are essential for
(Christen and Douglas, 2005; Nagarajan and Meyer, analysis, but it is difficult to collect primary data from all of these
2005; Khandker and Faruqee, 1999; Harper, lenders due to extensive time and cost involved. Hence, secondary
2005).Encouragingly, the central bank of Bangladesh has data applied in this study and data collected from Bangladesh
recently shifted agricultural/rural credit policy through Bureau of Statistics (BBS), Bangladesh Economic Review (BER),
and Bangladesh Bank (BB) publication of various years. Meanwhile,
incorporating all scheduled banks (including Private some relevant information gathered from Poverty Reduction
Commercial Banks and Foreign Commercial Banks) and Strategy Paper (PRSP), Fifth Five Year Plan of Bangladesh,
NGO-MFIs under agricultural/rural credit program. In fact, Ministry of Agriculture, Ministry of Livestock and Fisheries, and
agricultural/rural credit plays an important role in Ministry of Finance. These available sources confirmed data for the
enhancing productivity of agriculture (GoB, 2009; period of Financial Year 1980-81 to Financial Year 2010-11 (31
Chowdhury, 2009) and the participation of all formal years).
After collecting required (time series) data these were analyzed
banks obviously added extra value. based on study objectives. Undoubtedly, it is difficult to establish a
These formal financial institutions offer micro-credit causal relationship between agriculture credit and production due to
services for poverty alleviation like NGO-MFIs besides the existence of critical endogeneity problem. It is argued that credit
agricultural credit (CDF, 2006; Bayes, 2011). In the line of does not affect the output directly rather it has an indirect effect on
credit policy, the Private Commercial Banks (PCBs) and output through easing the financial constraints of the producers in
purchasing inputs. In contrast, Sriram (2007) argued that increased
Foreign Commercial Banks (FCBs) are encouraged to
supply and administered pricing of credit help in the increase in
extend lending facilities through partnership agreement agricultural productivity and the well being of farmers. Similarly,
with the NGO-MFIs as they have fewer or no rural branch Rashid and Zeller (2002) found that credit constrained small farms
offices. Recently, a new system has been introduced (in allocated less land to High Yielding Varity (HYV) rice, use less
2009) to disburse agricultural credit at Union level openly inputs and affect the productivity. More importantly, Carter (1989)
(field or union parishad office rather than to a bank) so argued that credit affects the performance of agriculture in three
ways: (i) it encourages efficient resource allocation by overcoming
that only true farmers can get the credit (BB, 2011). Mean constraints to purchase inputs and use them optimally; (ii) if the
while, a comprehensive monitoring strategy for agricul- agricultural credit is used to buy modern farm technology it shift the
tural credit system has been adopted by the Bangladesh entire input-output frontier—in this regard it embodies technological

Electronic copy available at:

6442 Afr. J. Agric. Res.

Figure 1. Credit disbursement, outstanding and overdue as percentage of the outstanding

loans overtime.

change and a tendency to increase technical efficiency of the agricultural production, Bangladesh bank requires all
farmers; and (iii) credit can also increase the use intensity of more scheduled banks (SCBs, SBs, PCBs and FCBs) to
fixed resources like land, family labor, and management,
persuaded by the ‗nutrition-productivity link of credit‘—that raises
mobilize credit into agricultural sector. These financial
family consumption and productivity. Therefore, agricultural credit is intermediaries have offered short and long term credit
used an independent variable in this study. In reality, agricultural according to the purposes of agricultural activities.
production is influenced by several factors (socio-economic and According to BB recent report, about 63% (Tk. 52.16
technological factors) but present paper only considered billion) of credit disbursed as short-term lending and the
agricultural/rural credit disbursement factor to determine the rest 37% (Tk. 30.63 billion) as in the form of long-term
relationship between agricultural credit and production obliviously
one of the major limitations of this study. Microsoft Excel and
loans. Long term loans are used for purchasing irrigation
Statistical Package for Social Sciences (SPSS) were applied for equipments, agricultural machinery, livestock,
analyzing the data in a meaningful way. Simple statistical horticultures, fisheries, and establishment of agro-based
techniques, that is, linear and exponential equations were adopted. industries etc.
These equations are very simple and convenience to use. A linear Typically, short-term loans are provided for seasonal
function grows at a constant rate whereas an exponential function
agricultural production activities. Nevertheless,
grows at a rate which increases (or decreases) over time. It is more
worthy to use exponential equation as agricultural credit and performance of agricultural credit has measured based on
production supposed to be non-linear relationship. Meanwhile, credit disbursement and recovery situation overtime.
Pearson Correlation equation also used to determine the More precisely, credit performance has evaluated from
significance of the relationship among variables. The linear and two angels-credit performance; one from the lenders‘
exponential equations are as follows: point of view, and second, the credit performance from
the perspective of specific agricultural sub-categories.
Ye  a  bt (1)
Figure 1 shows total disbursement, outstanding loans,
and loan overdue as the percentage of the outstanding
Ye = Aebt ……………. (2)
loans during FY 1980-81 to FY 2010-2011. Outstanding
After taking log, the equation is: loans show an upward trend at slower pace during 1981-
2007, but since 2008 the trend has turned upward sharply.
ye = a +bt……………. (1) It might be a reason for introduction of PCBs and FCBs
Where, ye= dependent variable, a= intercept, b=Co-efficient, t=
into agricultural/rural financing. Overdue as the percent-
trend. tage of the outstanding loans was fluctuated until 2001,
then started to go down which implies that the
performance of recovery has improved in recent years.
RESULTS AND DISCUSSION Despite an increasing trend of agricultural credit
disbursement and outstanding balance, the percentages
Performances of agricultural/rural credit
of agricultural credit in terms of total bank credit were
With growing demand of agricultural credit for sustainable found more or less at static level. For example, agricultural
Rahman et al. 6443

Table 1. Banks advances, agricultural credit disbursement and percentages of agricultural credit from total bank
creditsof (Tk. in billion).

Year Total bank credit Agricultural credit % of agricultural of credit from total bank credit
1997 417.65 15.17 3.63
1998 479.90 16.42 3.42
1999 539.84 30.05 5.57
2000 593.62 28.51 4.80
2001 687.78 30.20 4.39
2002 767.72 29.54 3.85
2003 847.34 32.78 3.87
2004 951.30 40.48 4.26
2005 1117.32 49.57 4.44
2006 1291.65 54.96 4.26
2007 1465.73 61.67 4.21
2008 1815.53 61.67 3.40
2009 2090.40 92.84 4.44
2010 2574.43 111.17 4.32
March, 11 - 91.54 -
Source: BB annual report (2001-2010); BER (2011),and BBS (2008).

credit constituted only 3 to 5% of total bank credit during offices. According to BB annual report in 2010, SCBs and
2001-2010 (Table 1). It is depicted in Table 1 that the SBs had 2,149 (63%) and 1205 (88%) rural branches
maximum share of agricultural credit was sanctioned in respectively as end of June, 2010 (Table 2). In contrast,
2000 (4.8%) and the minimum was in 2008 (3.40%). private commercial banks had only 535 (22%) rural
branches out of total 2427 branches but none of foreign
commercial banks had branch offices in rural areas.
Performance by lenders Foreign banks had 53 branches in Bangladesh and all of
them situated in the metropolitan city areas (Table 2). In
Accessibility of banking services to small and marginal contrast, NGO-MFIs have extensive rural networks to
farmers is necessary to keep smooth growth of the extend their services to the rural poor people and the
agricultural sector. Hence, SCBs and SBs are playing a farmers.Beyond doubt, Bangladeshi NGO-MFIs have
vital role particularly SBs are dominating the agricultural been played an important role to extend financial services
credit market. Encouragingly, PCBs and FCBs have to the rural poor farmers particularly creating employment
begun to participate in agricultural financing in recent opportunity for them. For instance, ASA (Association for
years (since 2008). They are distributed agricultural credit Social Advancement) has adopted agribusiness loan
through their branch network and in collaboration with (Rahman et al., 2011a) while BURO Bangladesh (a
NGO-MFIs. NGO-MFIs linkage program to channel credit national MFIs) has built linkage program with Bangladesh
can be treated as positive movement but the concerning Bank and other private commercial banks to extend credit
matter is that such linkage program increases the cost for services to the marginal and small farmers. Interestingly,
lending. It is argued that the credit become costly for the BRAC (Bangladesh Rural Advancement Committee)
farmers to have their production profitable (CDF, 2006; launched sharecropper development project funded by
Rahman, 2004). the Bangladesh Bank in 2009 with Tk 5 billions as
This is because of NGO-MFIs borrow these funds from revolving fund to finance sharecroppers. BRAC also
PCBs/FCBs at high interest rate; after adding their cost provides technical assistance to the sharecroppers under
the mark-up interest rate on credit become above 20-22%, this project. These attempts have definitely reduced the
which is well above the market rate of interest available sufferings of the poor tenant farmers who cannot make
for agricultural credit. On the other hand, SCBs have required investments in crop cultivation due to severe
branch offices at upazilla (lower administrative unit) level cash constraints. Table 2 shows the branch network of
but not at village level while SBs have village level branch scheduled banks and selected NGO- MFIs. Figure 2, 3
6444 Afr. J. Agric. Res.

Table 2. Number of branch offices by various lenders end of June, 2010.

Banks No. bank Total branches
Urban Rural
SCBs 4 1245 (37) 2149 (63) 3394
SBs 4 157 (12) 1205 (88) 1366
PCBs 30 1595 (78) 535 (22) 2427
FCBs 9 59 (100) 0 (0) 59
Scheduled bank total 47 2056 (28) 5190 (72) 7246

Grameen Bank 2562
BRAC About 3000
ASA 3236
TMSS 533
BURO Bangladesh 506
Parentheses indicate the percentage.

Figure 2. Actual credit disbursement by various lenders during 2002-2010.

and 4 show the actual credit disbursement, outstanding agricultural credit disbursement by PCBs appeared
balance, and overdue as the percentage of the upward trend while it was opposite trend for FCBs.
outstanding agricultural credit by various lenders. Agricultural credit disbursement of PCBs increased by Tk.
Typically, credit disbursement and outstanding balances 25.84 billion (annual growth rate about 22%) in 2010 from
were observed at upward trend during 2002-2010 for all Tk. 15.60 billion in 2008. In contrast, FCBs agricultural
lenders. SCBs and SBs contributed significantly in credit disbursement went down by Tk. 5.54 billion
respect to credit disbursement and outstanding balances (annually dropped about 18%) in 2010 from Tk. 8.5 billion
over the period. For instance, actual disbursement of in 2008. It may be a reason for the absence of branch
agricultural credit was Tk 82.79 billion against set target offices in rural areas and lack of partnership agreement
of Tk. 84.53 billion in 2010, while in 2002 it was only Tk. with NGO-MFIs as distribution channel. On the other
29.54 billion against the set target of Tk. 33.27 billion. The hand, NGO-MFIs performed extremely well. It is noted
target attainment increased to 97.94% in 2010 from that only top five NGO-MFIs (Grameen Bank, BRAC, ASA,
88.78% in 2002. Within the disbursement credit, SCBs TMSS and BURO Bangladesh) performances were taken
and SBs contributed Tk.19.82 and Tk. 62.97 billion into account. Credit disbursement of the selected NGO-
respectively in 2010. It can be seen in Figure 3 that the MFIs reached at Tk.252.94 billion (annual growth rate-
Rahman et al. 6445

Figure 3. Outstanding balance of agricultural credit by various lenders during


Figure 4. Overdue as the percentage of the outstanding agricultural credit by

various lenders during 2002 to 2010.

49%) in 2010 compared to Tk. 39.15 billion in 2000.It is trend of outstanding balances obviously indicates the
appeared in Figure 3 that outstanding credit balances for lenders‘ commitment to financing agricultural sector in
SBs had increased at slower rate during 2002- 2006, then Bangladesh. Encouragingly, outstanding balances for
dramatically fell in 2007, and regained sharply since 2008 selected NGO-MFIs had increased very sharply over the
on-wards. Similarly, SCBs outstanding balances had period.The outstanding balance increased by Tk. 150.05
increased gradually overtime. billion (annual growth rate- 38%) in 2010 from Tk. 28.81
In 2010, outstanding loans for SCBs and SBs increased billions in 2000.Overdue as percentage of the outstanding
by Tk. 60.99 billion (annual growth rate 9%) and Tk. loans is an important indicator of credit performance. It
138.61 billion (annual growth rate about 8%) from Tk. was measured by multiplying overdue loan * 100 and
33.46 billion and Tk. 81.53 billion in 2002 respectively. then divided by the outstanding balance in a particular
Same as SCBs and SBs, PCBs and FCBs outstanding year. Overdue as the percentage of the outstanding loans
balances were also increased by Tk. 21.08 billion (about higher rate implies lower credit recovery, hence lower
8% growth rate per year) and Tk. 5.19 billion (annual credit performance by the lenders. Figure 4 presents the
growth rate 24%) in 2010 compared to Tk. 16.73 billion overdue as the percentage of the outstanding loans by
and Tk. 3.01 billion respectively. The gradual increasing various lenders. Overdue as the percentage of the
6446 Afr. J. Agric. Res.

Table 3. Agricultural credit allocation and target attainment by sub category during 2001 to 2010.

Crops livestock Fisheries Poverty allevition Others*

Year Share Attainment Share Attainment Share Attainment Share Attainment Share Attainment
(%) (%) (%) (%) (%) (%) (%) (%) (%) (%)
2001 45.10 83.87 2.62 65.83 2.68 61.83 14.27 65.2 35.33 120.33
2002 43.13 68.64 3.72 76.92 2.27 62.62 15.67 79.0 35.24 112.95
2003 51.77 90.31 4.51 79.57 1.71 47.46 8.96 91.3 32.94 71.98
2004 45.58 78.31 6.13 89.21 2.74 63.79 9.98 116.8 35.57 87.19
2005 42.53 75.61 5.75 74.22 2.70 48.38 13.69 82.8 35.32 163.37
2006 40.10 77.33 5.02 57.74 4.20 76.49 9.15 63.4 41.52 606.12
2007 43.19 75.47 5.04 50.00 4.55 68.08 23.71 111.4 23.50 151.22
2008 39.95 78.82 4.80 54.11 5.24 68.14 27.38 115.3 22.62 148.98
2009 40.82 91.77 4.49 50.65 4.89 70.37 30.90 116.4 18.88 166.12
2010 40.09 92.50 4.93 56.20 4.83 73.66 32.33 126.8 17.82 161.30
*Purchasing irrigation equipments, marketing agricultural products, and other agricultural activities.

outstanding loans for SCBs and SBs loans appeared and other agricultural activities). Table 3 represents the
extremely higher because of inappropriate client selection, percentages of credit allocation (share) over total
political interference, nepotism, and especially the lack of agricultural/rural credit and target attainment by sub-
supervision and monitoring approaches (Rahman, 2009; category during 2001-2010. As it is expected, credits for
Chowdhury and Ahmed, 2009). crops composed highest percentile (60% for crops sub-
However, a certain progresses accomplished over time. sector). Crops‘ share of agricultural credit had reached
For instance, SCBs overdue loan as the percentage of maximum level at 51.77% in 2003 while it dropped to a
the outstanding loan dropped by 43.38% in 2010 from minimum of 39.95% in 2008. Hence, target and actual
72% in 2002. Similarly, SBs overdue as the percentage of disbursement of crops credit gradually increased overtime
the outstanding loans declined by 20.40% in 2010 and reached at Tk. 35.88 and Tk. 33.19 billion in 2010
compared to 46% 2002 (Figure 4). Interestingly, PCBs respectively. However, the target attainment of crops
overdue as the percentage of the outstanding loans found credit was always found below the settled target, which
below 3% while it was always zero for FCBs. Therefore, can be treated as lower performance achievement. Credit
there is an urgent call for SCBs and SBs for further disbursement gaps estimated lowest at 8% (Tk. 2.6 billion)
improvement of their loan recovery rates. On the other in 2010 and highest 25% (Tk. 7.43 billion) in 2007.
hand, PCBs and FCBs made significant achievement on Similarly, target and actual disbursement of livestock
recovery loans, however, they should increase credit were observed increasing trend overtime.
agricultural credit allocation considering their contribution However, the gaps between target and actual
to agricultural credit lower in an absolute term (2.5% as disbursement increased significantly after 2005 on-wards.
credit norms). It is worth to mention that the NGO-MFIs For example, in 2010, livestock credit target had been set
overdue as the percentage of the outstanding loans at Tk. 7.26 billion but actual disbursement attained only
declined to 3.73 in 2010 from 8.7% in 2000. The NGO- Tk. 4.08 billion (the target attainment was only 56 per
MFIs performances on credit disbursement and recovery cent). Even, disbursement gaps worsen in 2007 only 50
can be delineated as extra ordinary achievement in per cent of settled target had achieved. Nothing
Bangladesh. expecptional, target and actual disbursement of fisheries
credit also increased at signficant rate particularly after
2005 on-wards. The fisheries credit disbursement target
Performance by agricultural sub-sector was attained highest level at 76.49% in 2006 while it was
lowest level at 61 per cent in 2001. It is argued that lower
In this section agricultural credit performances is capital inflow to these agricultural sub-sectos can be
analyzed at sub-category levels, that is, crops, livestock, attributed to under utilisation of the potentiality of these
fisheries, poverty alleviation and others credit (purchasing sectors which ultimately obstacles toward sustainable
irrigation equipments, marketing agricultural products, development. On the other hand, credit allocation and
Rahman et al. 6447

actual disbursement for poverty alleviation and other al., 2009). Another study in Pakistan found positive and
components (purchasing irrigation equipments, marketing significant relationship between institutional credit and
of agricultural products, and other agricultural activities) agricultural GDP (Iqbal et al., 2003).
were depicted very impressive. In fact, credit inflow to Likewise food grain production, fisheries production
these sub-categories has had positive impact on overall also highly correlated (0.948) with agricultural credit
agricultural development. Even, the credit for poverty disbursement and statistically significant at 1% level.
alleviation has also had somehow influence on Livestock products - milk, meat and eggs were
agricultural production as the credit goes to marginal or moderately correlated with the point of 0.772, 0.938 and
small farmers, fisherman, small scale businesses etc. It is 0.688 respectively and statistically significant at 1% level.
worth to notify that loan for poverty alleviation exceeded It is noted that Abedullah et al. (2009) study in Pakistan
the defined target since 2007 on-wards. Credit found that credit availability expanded the livestock sector
disbursement target for other components also exceeded more than double (economies of size), which increased
the defined target almost ever year (exceptions are 2003 per family per month income from livestock sector by 18%
and 2004). Target attainment and exceeding settled and also helped to increase the productivity of livestock
target for these sub-categories can be regarded as sector from the available resources. On the other hand,
potential achievement towards overall agricultural Sial et al. (2011) Granger causality test shows the uni-
development. Poverty alleviation and others components directional causality among institutional agricultural credit
loans had paid higher priority compared to livestock and and agricultural production and among water availability
fisheries sub-sector. Therefore, lower target attainment of and agricultural production.
crops, livestock, and fisheries credit leaded to less capital The R2 value in the linear model was 0.879 and 0.899
inflow to these sub-sectors and might shackles for food grain and fisheries production respectively that
agricultural production. implies independent variable (agricultural credit) can
explain about 88 and about 90% of the dependent
variable (production) of food grain production and
RELATIONSHIP BETWEEN CREDIT DISBURSEMENT fisheries production changes respectively. The R2 value of
AND PRODUCTION liner model for milk, meat and eggs were 0.597, 0.873
and 0.474 respectively which represent that independent
Undoubtedly, credit access to agriculture farming, variable (livestock credit) can explain only 59, 77 and
livestock and poultry raising and fish farming have 51% of the dependent variables (production) of milk, meat,
somehow impacts on production. With this notion, time and eggs respectively. Similarly, the exponential model
series data is used to determine the relationship between also shows that independent variable (agricultural credit)
actual credit disbursement and agricultural production. can explain 81 and 79% of the dependent variable
Table 4 presents the overall relationships between credit (production) of food grain production and fisheries
disbursement and production of food grain, livestock, and production respectively. As per Bangladesh Bank credit
fisheries. Summary results (Table 4) generated by policy, credit disbursement target sets by sub-sector wise,
applying production (crops, livestock, and fisheries) and that is, crops, livestock, fisheries etc.
credit disbursement data for the period of FY 1980-81 to Therefore, Table 5 shows the relationship between
FY 2010-11. credit and production for a particular agricultural product.
Table 4 depicts, food grain production was highly It is noted that relationship between actual credit
correlated (0.938) with agricultural credit disbursement disbursement and sub-sectors (crops, livestock, and
and statistically significant at 1% level. So, the agricultural fisheries) production have determined based on time
credit disbursement was positively related with food grain series data from FY 2000-01 to FY 2009-10 due to lack of
production. The outcome of the present study is credit disbursement data (before 2001) by sub-sectors.
supported by several empirical studies in many deve- From Table 5 it is observed that food grain production
loping countries including- Miah et al. (2006) empirical was highly correlated (0.905) with crops credit
study in Bangladesh confirmed that agricultural credit disbursement and statistically significant at 1 per cent
users achieved 1.21 times higher rice yield compared to level. Similarly, fisheries production was also highly
non-credit users. Similarly, Bashir and Mehmood (2010) correlated (0.970) with the fisheries credit and statistically
empirical study in Pakistan found positive and significant significant at 1 per cent level. Livestock products- milk,
relation between credit and productivity of rice. In India, meat and eggs were moderately correlated with livestock
the empirical analysis found that the agriculture credit credit disbursement at value 0.839, 0.839 and 0.818
amount has a positive and statistically significant impact respectively and statistically significant at 1% level. The
on agriculture output and its effect is immediate (Das et R2 value in the linear model was 0.819 and 0.940 for food
6448 Afr. J. Agric. Res.

Table 4. Relationship between agricultural credit disbursement and production of crops, livestock products and fisheries during FY1980-81 to 2010-11.

Linear model Exponential model Pearson

Particulars 2 2
R Intercept (a) Coefficient (b) t R Intercept (a) Coefficient (b) t Correlation
Food grain 0.879 1.651E4 196.685 210.98** 0.811 1.689E4 0.008 124.69** 0.938**
Milk 0.597 1.384E3 10.571 28.11** 0.524 1.371E3 0.006 0.524** 0.772**
Meat 0.873 476.347 8.148 123.78** 0.810 509.08 0.010 76.88** 0.934**
Eggs 0.474 2.616E6 3.185E4 16.198** 0.239 2.191E6 0.011 5.667 0.688**
Fisheries 0.899 791.399 23.772 257.82** 0.787 852.194 0.015 107.44** 0.948**
** Significant at less than 1% significance level (2 -tailed).

Table 5. Relationship between credit disbursement and production of crops, livestock products and fisheries applying sub-sector wise data during FY2000-01 to 2009-

Linear model Exponential model Pearson

Particulars 2 2
R Intercept (a) Coefficient (b) t R Intercept (a) Coefficient (b) t correlation
Food grain 0.819 1.975E4 419.06 36.27** 0.818 2.115E4 0.014 35.87** 0.905**
Milk 0.704 1.538E3 244.532 19.042** 0.746 1.584E3 0.119 23.499** 0.839**
Meat 0.928 605.215 157.789 103.71** 0.938 654.654 0.164 121.63** 0.839**
Eggs 0.669 3.926E6 4.655E5 16.134** 0.676 3.994E6 0.095 16.654** 0.818**
Fisheries 0.940 1.738E3 279.147 125.52** 0.921 1.783E3 0.121 93.11** 0.970**
** Indicates as 1% significant level (2 -tailed).

grain and fisheries production respectively which of milk, meat, and eggs respectively. Interestingly, relation between credit and productivity of wheat.
implies that independent variable (crops credit) more or less similar outcomes were found in Interestingly, recent study of Bashir and Mehmood
can explain 82 and 94% of the dependent variable exponential growth model. It is much pleasure to (2010) found similar results by using same
(production) of food grain and fisheries production say that the agricultural credit has positive and approach in case of rice production, that is, credit
respectively. On the other hand, R2 value of liner significant relation with agricultural production has positive and significant impact in increasing
model for milk, meat and eggs were 0.704, 0.928 (food grain, fisheries and livestock). In fact, productivity of rice. Meanwhile, Saleem and Jan
and 0.669 respectively which represents that several previous studies also found more or less (2011) concluded that one percent increase in the
independent variable (livestock credit) can explain similar outcomes like present study. For example, disbursement of institutional credit increased
70, 93, and 67% of dependent variables (production) Bashir et al. (2009) found positive and significant agricultural GDP about 1.5% and credit is very
Rahman et al. 6449

important for agricultural productivity. Boni et al. (2010) However, the selection bias is still prevail as bank officers
analysis confirmed positive and significant relationship given special priority to their relatives, friends, and those
between agricultural credits and a host of other variables maintain good relation with bank personnel in selecting
such as farm revenue and the use of input like fertilizer. the borrowers (Rahman, 2009). Thus, appropriate
Therefore, it can be concluded that credit has a significant monitoring and supervisory approach should be adopted
impact on agricultural production and satisfied the answer by the central bank to reduce the tendency of
of second research question. malpractices by the bank personnel.


Typically, farmers have to keep some of his/her assets as
In the past, lot of questions and complaints were raised mortgage for obtaining loans from scheduled banks. Even,
by the farmers at field level on the effectiveness of credit the formalities and procedures are complex requires
polices. Typically, performance of various lenders is longer time. As most of the farmers are illiterate, they
determined based on credit disbursement, outstanding caution about the formalities/contract eventually they lost
loan, recovery rate etc. while selection/judgment of the their intention to borrow from formal banks. Despite
appropriate clients and harassment for obtaining credits recent initiative for extending credit to marginal and small
are neglected. Encouragingly, Bangladesh Bank has farmers through guarantee of land owners or responsible
upgraded agricultural/rural credit policies particularly sets person from village, has not gained much success as
target for individual lenders and offering some incentives. small and marginal farmers find difficulties to accomplish
However, there is still scope for further improvement. the requirements. Not to mention, group lending approach
Therefore, following section tries to address the major is so successful in Bangladesh, hence it is proposed to
challenges for agricultural and rural financing and adopt group guarantee approach same as NGO-MFIs to
proposes some remedial measure to overcome these expedite the agricultural credit disbursement.
difficulties based on present and past study findings.

Credit recovery
Inadequate rural branch offices
It is apparent from previous discussion that the overdue
As mentioned earlier, only SBs have rural branch offices as percentage of the outstanding loans found higher for
at village level while SCBs have branch offices at upazilla SCBs and SBs which definitely a concerning issue for the
level. Hence, farmers are reluctant to handle the banks providing agricultural credit in a long run (Figure 4).
application and other formalities at upazilla level having It may also be discouraged PCBs and FCBs for extending
their extreme busyness during pick season of agricultural agricultural credit furthermore in a larger scale although
farming. On the other hand, PCBs do not have adequate they achieved significant recovery at present context.
branches in rural areas while FCBs do not have any rural Besides taking legal action against default farmers, there
branch offices to expand their rural or agricultural credits should have frequent motivation and propaganda for
which tend to reduce the business scale and performance encouraging farmers to repay their loans on time.
(Table 2). Hence, NGO-MFIs linkage program to
channeling the credit can be treated as positive
movement but the concerning matter is such linkage Balancing farmer preferences
program increase the cost for lending (CDF, 2006). So, it
is suggested to adopt cost sharing mechanism or Generally, farmers are enthusiastic to borrow from formal
Bangladesh bank should consider providing soft loan to lenders particularly from specialized banks (BKB, RAKUB)
limit the lending cost. due to lower interest rates. However, most of the farmers
face difficulties to borrow from them due to collateral
requirement, complex application procedures, claim on
Farmer selection bias bribe, lack of required amount of credit and in timely
fashion etc (Rahman et al., 2011b). Hence, they prefer to
Bangladesh bank has encouraged all scheduled banks to borrow from NGO-MFIs as easily accessible to them and
collect farmer information from department of agricultural require less formality. There are concerns that NGO-MFIs
extension to identify the real farmers (Rahman, 2010). are little shy to lend to farmers in absence of a real group
6450 Afr. J. Agric. Res.

model, potential of credit risk due to natural calamity, importance of agricultural sector for achieving self-
government pressure on subsidized interest rate for sufficiency in food. So, allocation of agricultural credit
agriculture sector etc (Bayes, 2011). So, it is quite should be increased considering growing demand and
challenging to make balance between farmer preference importance of agricultural credit.
and the reality of agricultural credit market. To address
such challenges, it is suggested to adopt simple applica-
tion and loan approval process by the scheduled banks, Uneven distribution of agricultural credit
meanwhile NGO-MFIs should be encouraged to extend
their group lending approach in agricultural lending. Within agricultural credit allocation among sub-categories,
the livestock and fisheries sub-sectors were neglected
(Table 3). Even, the target attained was only between 50
Interest rate and repayment methods to 70%, while other sub-categories almost reached their
settled target even exceeded the defined target.
Generally, farmers have to pay higher interest rate for Considering the contribution of livestock and fisheries
theloans they borrow from NGO-MFIs. The initiative to sub-sectors (2.66 and 4.49% agricultural GDP) the
channeling credit through NGO-MFIs is not so productive. allocation need to be readjusted as well as must trace the
The concern is that the credit became costly for the reasons for lower target achievement.
farmers to have their production profitable. This is
because the NGO-MFIs borrow these funds from
PCBs/FCBs at high interest rate; after adding their cost Supervised credit
the mark-up interest rate on credit become above 20-22%,
which is well above the market rate of interest available Despite central bank initiatives, there is still lack of
for agricultural credit (CDF, 2006). So, the higher interest supervision and monitoring services from lenders side
rate may shirk the market access of PCBs and FCBs. particularly it is true for SCBs and SBs. Hence, farmers
Generally, NGO-MFIs provide credit for short period of are transferring agricultural credit to non-farm or business
time and ask for weekly repayment which may not be purposes as farming is more risky compared to non-
suitable for agricultural sector. It is expected that farming activities (Miah et al., 2006). To reduce such
agricultural loans should be advanced at the beginning of deviation of agricultural credit there is nothing better than
crops farming, livestock and poultry raising, fish farming proper monitoring and supervision.
etc. and repayment should be made after getting returns
from the investment. In the meantime, the interest rate for
agricultural credit should be caped at minimum level Agricultural insurance
considering agricultural as priority sector.
In Bangladesh, the agricultural insurance system has not
yet been developed (Rahman, 2009). The earlier initiative
Political interferences on crop insurance failed due to lack of government
patronization, and lack of interest from insurance
In the past, there were several evidences on exemption of companies due to higher risk in agricultural farming.
interest rate for agricultural credit due to political favor, Therefore, the government patronize insurance company
hence farmers waited for further opportunities and delay (Jiban Bima) should come forward to channeling the
to repay their loans (Miah et al., 2006). In addition, bank insurance facilities to agricultural sector (crops, livestock,
directors have recruited on political consideration- the fisheries etc.)
directors use the banks' vehicles for their personal
purposes as well as based on political wishes. Thus, it is
suggested to keep financial intermediaries away from Conclusions
such political good will.
Agricultural sector financial access has expanded over
the decades with the combined efforts of scheduled
Agricultural credit share over total bank advances banks and NGO-MFIs. Not to mention, Bangladesh bank
policy on agricultural/ rural credit has promoted the
The percentages of agricultural credit over total bank access to credit for small and marginal farmers. Although
credit were observed more or less at static level PCBs and FCBs contributed limited in respect to credit
between3-5% (Table 1). It is regarded that the allocation disbursement but their participation in agriculture/rural
for agricultural credit was unrealistic considering the financing deemed as major movement of formal private
Rahman et al. 6451

banks to financing in rural Bangladesh. Many PCBs and Adams DW, Graham DH (1981). A critique of traditional agricultural
credit projects and policies. J. Dev. Econ., 8 (3):347-366.
FCBs have forged linkages with NGO-MFIs for expanding
Bashir MK, Mehmood Y (2010). Institutional credit and rice productivity:
market horizon in a viable and sustainable manner, while a case study of District Lahore, Pakistan. China Agric. Econ. Rev.,
SCBs and SBs have been using their existing branch 2(4): 412-419.
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commercial banks on the productivity of wheat in Faisalabad district.
Encouragingly, performance of PCBs and FCBs were
China Agric. Econ. Rev., 1(3): 275-282.
found very impressive in terms of credit recovery although Bayes A (2011). On rural credit market, The Financial Express, Vol. 226.
they have recently involved in agricultural financing (only Dhaka, Bangladesh, June 21, 2011, available at:
3 years). Overdue as the percentage of the outstanding (
loans were found declining trend for all lenders including BB (2001-2009). Bangladesh Bank annual report for financial year
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irrigation equipment, poverty alleviation, and other related Boni PG, YD Zira (2010).Credit supply and resource productivity among
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ACKNOWLEDGEMENT GoB (2009). Policy study on Financing growth and poverty reduction:
Policy challenges and options in Bangladesh, General Economic
Division, Planning Commission,Government of the People‘s Republic
This paper is supported by ―study on openness, efficiency and Bangladesh and UNDP Bangladesh.
and policy system of rural financial market in west China‖ Harper M (2005). Farm credit and microfinance - is there a critical
National Natural Science Foundation of China (NSFC), mismatch?‖ Small Enterp. Dev. J., 16 (3):58-68.
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